Technical analysis can be divided into three distinct areas. First, the analysis of the graphics themselves, using drawing and plotting tools. Then technical indicators, which mathematically restate the price data to derive trading signals. And finally, the candlestick analysis, which focuses on identifying particular patterns and successions of Japanese candlesticks, so each has a precise interpretation. In this article, you will therefore find detailed explanations on several types of forex analysis, in order to instill in you the basics of technical analysis and explain exactly how to do technical analysis.
Forex Graphical Analysis
graphical analysis, as its name suggests, is based solely on the study of charts. It is about spotting particular configurations that allow trading decisions to be made. Concretely, this often consists of drawing lines on the charts in order to highlight important trends and thresholds. Below you will learn how to use the most important forex chart analysis tools: resistances and trend lines.
Forex Analysis with Supports
A support is a technical configuration at the price level at which an asset does not fall. below for a certain period of time. The support level of an asset is created by buyers entering the market when the asset drops to a lower price. In technical analysis, the simple support level can be represented graphically by drawing a horizontal line along the lowest prices for the period considered.
When it comes to trading, the support level is the level at which buyers tend to buy, and therefore bounce prices. Obviously, the supports are not eternal, and inevitably come to be overtaken by the bottom. This is called a breakout, and it is a bearish signal.
Support and resistance levels (which we’ll see right after) are at the heart of technical analysis. Traders use support and resistance levels to plan entry and exit points for trades.
Forex Technical Analysis with Resistances
Resistance is a technical setup which is the inverse of supports. While the supports bounce the falling currencies, the resistances block the advancing currency pairs. Thus, resistance is generated by sellers entering the market from a certain level that they consider excessive. Just like supports, resistances are represented on the charts by horizontal lines.
From a trader’s point of view, therefore, sell when a currency pair approaches resistance. Resistance is not eternal either, and always comes to be overcome at some point. In this case, it is a bullish signal potentially heralding a bullish acceleration.
Finally, like supports, resistances are used to know when to enter the market, but also when to exit.
As seen in the chart above, the trading decision to be made when faced with resistance is usually to sell.
Forex Technical Analysis with Trend Lines Trend
Trend lines show a trend, either bullish or bearish. These are sort of oblique support and resistance levels.
A downtrend line is drawn by connecting peaks, as shown in the diagram below.
The uptrend lines are drawn by connecting troughs, as below:
An uptrend line indicates that prices are rising, and that it is therefore necessary to position yourself to buy, ideally immediately after a contact with the trend line. A downtrend line indicates to sell, preferably immediately after price contact with the line.
It is important to note that there are often multiple trend lines visible on the same chart. At any time, you can draw multiple trend lines, all of which show the price development over different time periods.
Very steep angled trend lines usually have a short lifespan because they cannot continue a near vertical fall or rise for a long time.
Drawing trend lines whenever possible can help new traders spot the overall trend, while highlighting corrections and small trends within that general trend too.
Reading Japanese Candlesticks in Technical Analysis
Finally, another method of forex technical analysis is to analyze the candles that make up Japanese candlestick charts. This is because the shape of these candles can give an indication of the trend and provide forex trading signals. We will discuss 3 of these special cases below.
The hammer candlestick pattern is formed by a short body with a long lower wick, and sits at the bottom of a downtrend.
A hammer shows that while there was selling pressure during the day, it was ultimately strong buying pressure that pushed the price up. Body-color may vary, but green hammers indicate a stronger bull market than red hammers. In both cases, this is a positive signal, as the buying pressure was ultimately stronger than the selling pressure during the forex trading day.
A similar popular pattern is called an inverted hammer. The difference is that the lower wick is shorter and the upper wick is longer .
It indicates buying pressure, followed by selling pressure which was not strong enough to lower the market price. It is therefore, as for the previous configuration, a positive signal and therefore an indication to buy.
Bullish and Bearish Japanese Candle
Covers The bullish cover pattern consists of two candlesticks. The first candle is a short red body that is completely engulfed by a larger green candle.
Although the second day opens lower than the first, the bull market pushes the price higher, resulting in an obvious victory for buyers. In this case, the best trading decision at this time is therefore to buy.
Bearish encompassing is its exact opposite, with a green-bodied first candle which is then completely engulfed by a larger red candle. This is, as you might have guessed, a sell signal.
We tried to explain the 3 most technically prioritized among the various types of forex analysis in our article. After that, you can take advantage of different types of forex analysis while processing your forex investment strategies.
READ MORE: Forex Technical Analysis 101